COVID? NYC's Real Problem is the Internet

Old Enough to Remember

I went through 9/11. I remember people telling me we were never going to be able to get people to come back to lower Manhattan. Never bet against New York, because New York always comes back, bigger and better than ever before.

Larry Silverstein is back at the office. At 89, he’s not phased by risk. After the 2001 attack on the World Trade Center, he pulled up his sleeves and rebuilt the area surrounding the towers.

New York was tested again in 2008 and 2009 when tens of thousands of jobs were cut during the Great Financial Crisis. But the city bounced back, regaining the number of jobs lost by 2012.

And then COVID hit. New York lost more jobs than at any time since the Great Depression. But as the number of cases dropped, the city started opening for business. Silverstein is not the only one back at the office. Other landlords are, too. As Bloomberg reports:

A loose coalition of New York’s top property owners and managers is busily working the phones, pressing many of the city’s biggest employers to speed up the return of workers. Their argument: It’s safe, and the eateries and shops that make Manhattan special can’t hold out much longer. Some are calling it the patriotic thing to do. It would certainly help hard-pressed landlords.

In May, the city’s major tenants predicted that 10% of employees would return to the office by August. So far, only 8% are back, and offices are expected to remain half-empty until the middle of 2021.

New York’s real estate firms are bucking the trend. As TRD reports, 53% of their employees are “already at their desks,” and 94% are “anticipated to return sometime this year.”

It’s easy to dismiss this as a desperate effort by landlords to show buildings are safe. But I suspect that many real estate professionals are truly happier and more productive at the office. It’s a generational thing. The average real estate professional is around 50 years old. The industry’s love for the office may be genuine, but it does not tell us much about the future.

Too Young to Know

Tenants are not the only ones who got lots of calls from landlords last week. Journalists did, too. A flurry of articles is trying to convince us that all is well in New York.

First came the New York Times: “Facebook Bet Big on the Future of NYC, and Offices, With New Lease.”

Sadly, this deal has been discussed for over a year. At a small event in November 2019, I heard the landlord talk about it as if it was already done. Announcing it now makes for good publicity but doesn’t tell us much about Facbeook’s plans for the future.

Then it was the Wall Street Journal: “Amazon Bets on Office-Based Work With Expansion in Major Cities.”

“Bets big,” you say? The company announced 3,500 new jobs that will be spread across six different cities. For reference, Amazon employs close to a million people; in Q2 2020 alone, it hired more than 175,000 new ones.

The new “bet” is even less exciting than it sounds. The bulk of new office space used by said employees will be in an empty building that Amazon already bought months ago. The move reflects the culmination of existing plans, not new growth.

Don’t get me wrong. These deals aren’t bad news. But they’re nothing to get excited about either. And they’re probably causing more harm than good: Anything that increases the complacency of NYC’s government and landlords is a net negative

Speed Bumps

But NYC always comes back. That’s what happened in 2001, and that’s what happened in 2008 (and yes, let’s not mention what happened between 1950 and 1990).

When it comes to communication, 2001 had more in common with 1980 than it does with 2020. Back then, long-distance calls were considered a luxury. The number of fixed phone lines on earth was less than 15% of the current number of mobile phones. Less than 2% of retail sales were conducted online.

Even 2008 was considerably different. Barely 10 million iPhones were in use, 90 times less than today. There were hardly any Android phones. Uber, Instagram, or Zoom were not yet invented. Less than 12% of mobile phones had broadband internet; those that did had 3G, which was about ten times slower than the 4G networks we use today.

Even on desktop, the internet was very different. As James Altucher points out:

In 2008, average bandwidth speeds were 3 megabits per second. That’s not enough for a Zoom meeting with reliable video quality. Now, it’s over 20 megabits per second. That’s more than enough for high-quality video. There’s a before and after. Before: no remote work. After: everyone can remote work.

The full potential of new technologies is revealed over decades. The fax machine was introduced in 1847. The idea for a television tube was patented in 1884. The Web has barely been around for 30 years. Most people on earth did not have access to it even a decade ago.

We know very little about the internet’s full potential, particularly about its power to reshape urban centers.

Atomic Bomb

Cities can survive much worse things than mere viruses and bouts of unemployment. Hiroshima was devastated in 1945. It is now three times larger than it was back then.

But Hiroshima was rebuilt with foreign-aid during a period of rapid population and economic growth. It was a major industrial city in a country that was in the process of becoming an industrial powerhouse. It was connected to the preeminent networks of its age — the sea and the railway.

Hiroshima recovered because its destruction was sudden. It recovered because its destruction did not alter any of the reasons for an industrial city to exist where it existed. The end of the war created even better reasons for it to exist and to prosper. Cities don’t die when they are attacked or even destroyed. They die when they are no longer necessary. A crisis is simply an opportunity to retest old assumptions.

Are cities still necessary? Let’s consider why not.

The Case Against Cities

Cities emerged to solve a set of problems that no longer exist. Physical goods are already made and traded elsewhere. Information and intellectual property can now be produced and exchanged online.

Cities are predicated on a set of trade-offs that no longer make sense. Middle-class people tolerate density, pollution, disease, crime, high taxes, and expensive housing to access superior employment opportunities. If comparable opportunities can be accessed without the above costs, many people will opt-out of the current arrangement.

Cities bundle together classes of people and economic activities that no longer require each other’s proximity. Every job in the “innovation sector” contributes to the creation of five service jobs. The working class makes the city fun and convenient for the middle class (or creative class). The middle class tolerates the presence of other people because it needs them. Many (most?) goods and services are now available online and on-demand even outside urban cores.

The bundle no longer makes sense. In fact, it no longer exists. The few services that still require interaction with people of different classes are now governed by apps and algorithms. It is no longer necessary to get along with people or to be nice to them. You click on an app, someone delivers something, and you decide whether to add a tip without looking anyone in the eye. Many humans now act as placeholders for the robots that will imminently take over their jobs.

Of course, it is necessary to get along and to be nice. When humans are slighted and not treated as humans, bad things happen. This is one of the reasons for the unrest we’re seeing across cities. While the middle class is trying to figure out what’s going on, the working class already knows the current arrangement is finished. The unrest will only expedite the automation of many services. Essential work is too essential to be left to the working class.

The fact that many cities are no longer needed is not enough to make them go away.

Cities benefit from network effects that accumulated over decades or centuries. But COVID-19 tipped their network effects into reverse. Fewer people at the office make it less necessary for anyone else to be at the office. Fewer restaurants on a street make it less likely that any of the remaining restaurants will succeed. Higher consumption of online groceries, online services, and online entertainment increase the likelihood of more online consumption. And the longer this continues, the less likely it is that the old status quo will resume.

Cities are protected by path dependencies that make it difficult for people to leave — jobs, childcare, schools. But these dependencies have been broken. People have been forced to retreat to their homes or to leave the city altogether.

Now, cities need to convince them to come back. New York City, in particular. COVID-19 is not an atomic bomb. It did not destroy cities; it created a flash of light that exposed what was already happening.

Rising from the Ashes

In 2001, Frances Cairncross predicted how The Death of Distance will reshape cities:

“As individuals spend less time in the office and more time working from home or on the road, cities will change form concentrations of office employment to centers of entertainment and culture.”

Cairncross was only 50% correct. Work did become somewhat more flexible, and cities did become more entertaining. But the dominance of downtown office buildings only increased.

Between 2004 and 2015, job growth “disproportionately favored” dense U.S. metro areas such as New York and San Francisco. Companies in growth industries started showing a strong preference for urban areas. Startups took an “urban turn”, with more of them choosing to locate in New York, Boston, Santa Monica, and San Francisco proper rather than in the sprawling Bay Area, Route 128, or the suburbs of large cities.

The Great Financial Crisis was, indeed, a mere bump in NYC’s upwards trajectory. By 2012, the city recovered all the jobs it lost in 2008-2009. During the same period, the U.S. as a whole recovered a mere 40%. By 2016, “nearly all of America’s job recovery has been in the nation’s largest urban areas.”

In The Rise of the Creative Class, Richard Florida reconciled the Death of Distance with the revival of the city: Creative professionals were moving to cities because of “entertainment and culture” cited by Cairncross. Employees came for the lifestyle, and the jobs followed the employees.

NYC’s lifestyle is temporarily on hold. Some of it may be gone forever. New restaurants, and shops, and theatres can pop up once this crisis is behind us. But their emergence depends on the city’s ability to retain and create high-paying jobs.

COVID is not a threat to NYC’s high-paying jobs. But the internet is.

Spilling Over

Last week, I quoted Ed Glaeser: “the core idea at the center of information-based agglomeration economies is that all of our knowledge builds on things that we learn from people around us.“

Glaeser emphasized the idea of knowledge spillovers that occur when humans are in close proximity. Creativity benefits from spontaneous and indirect learning and, the theory goes, such learning is enhanced when people are in close proximity.

Cities also benefit from what economists call “thick labor markets” — markets that are large and have a variety of specialized candidates. Salaries in larger markets tend to be higher because large markets make it easier to match an idealcandidate with an ideal job.

As Moretti points out in The New Geography of Jobs, Mark Zuckerberg moved from Cambridge, MA to Silicon Valley in order to grow his new social media company. Cambridge has one of the highest concentration of educated people on earth. Zuckerberg could have found software engineers of a general quality that is second to none. But in Silicon Valley, the size of the talent pool enabled him to find excellent engineers that were also specialized in the exact type of processes/technologies/products he was looking to build.

Moretti compares this dynamic to an online dating site. Would you rather date in a poll of 10 candidates or 100? A bigger pool makes it more likely that you'll find a more ideal match. It makes it more likely than most of the other candidates will also find an ideal match. As such, it creates more value for everyone. That value is shared by market participants. Likewise, companies make more money when they can hire ideal employees — and ideal employees get paid better when they match with a company that desperately needs their specific skills.

Dating in Captivity

The internet is the biggest city on earth. It has a bigger pool of talent and capital than any physical place. That’s why online platforms are great for both dating and hiring. But dating is a prelude to mating. And mating requires proximity. Hiring is a prelude to working. Does work still require proximity?

Perhaps not.

As Matt Clancey points out that “the benefits of knowledge spillovers from being physically close to other knowledge workers have been falling and may no longer exist in many domains of knowledge.” This is a controversial claim, but Clancey provides a detailed review of multiple studies that address this matter from different directions.

Most existing research focuses on the pre-mobile-broadband era and the working habits of older generations. Over the next few years, we will get a better understanding of the internet’s potential to disrupt work as we know it. Meanwhile, it is already clear that for a growing minority of companies, work can be equally productive outside of cities. For a larger number of companies, remote or distributed work is less productive — but productive enough to alter the cost-benefit analysis of paying for expensive urban offices.

But work is not everything. And employees might prefer to live in cities in order to access other services and to date. But most cities are currently configured to prioritize office buildings over all other uses. How should they change?

I will continue to explore.

Go Down Moses

Let’s finish on an optimistic note.

"If your city is so big, if its problems are so many and so acute, it it seems to have grown beyond your capacity to govern it, if it is so old, so stubborn, so divided by reactionaries, visionary planners and demagogues, why give your time and strenght to the impossible?”

Robert Moses posed this question in a 1943 New York Times op-ed. He also answered it:

"Some of us like tough jobs. We like resistance and we don't think the task is impossible. We don't believe New York is going back. There is, of course, another reasons, for more influential, but like most deep emotions, hard to explain. You see, we love the town."

Have a great weekend.